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Gold Moves Tied to the Federal Reserve

Over the past few years, the moves in gold and other precious metals have become tied more and more closely to the actions of the world’s major central banks. As the Federal Reserve, European Central Bank, and, most recently, the Bank of Japan have flooded the financial markets with money, the price of gold has floated higher on the sea of liquidity.

One reason behind this year’s selloff in the yellow metal was the fear that the Federal Reserve may soon begin to withdraw the massive amounts of liquidity that it has injected into the financial markets. But that may be about to change.

According to the Wall Street Journal, next week Fed Chairman Ben Bernanke will try to calm the fear that has pervaded the market recently of the Fed ending its bond buying ($85 billion a month) program. The Journal article said that Bernanke will say that any move to reduce the amount of bonds it buys does not mean the Federal Reserve is anywhere close to actually ending the program.

AMP Capital head of investment strategy, Shane Oliver, wrote the following Friday: “The Fed will only start to slow and then unwind its stimulus program when it’s completely comfortable that the economic recovery is self-sustaining.” He added that the Fed will stress that any “interest hikes are still a long way away.” This should be good news not only for gold, but also the stock market. The S&P 500 index enjoyed its best day in five months yesterday after the late session Wall Street Journal report.

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